Because of California’s exorbitant home prices, house hunters who finance a purchase will most likely need a jumbo loan

The tech-sector gold rush in recent years has made San Francisco the nation’s most expensive place to buy a home, with a median sale price of $1,312,500, according to the California Association of Realtors (CAR).

Home prices are high in popular areas elsewhere in the state as well. In Los Angeles, the median home price is $486,310. But home buyers who want to live in L.A.’s most desirable areas will pay much more, and inventory is tight, says Eric Lavey, director of the estate division of Beverly Hills-based The Agency.

“Demand is high at every level and every price point,” he says. For homes priced at $2 million and under—even up to $3 million—the market is “insane” right now.

All of coastal California is basically insane right now, referring to real estate, of course. Yet government-backed conforming loans are capped at $625,500 in high-priced areas. So unless they can make a substantial down payment to qualify for a Fannie Mae, Freddie Mac or FHA loan, the only way many Californians can finance their mortgage will be a jumbo loan.

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“California is by far the biggest lending state when it comes to jumbo mortgages—both in dollar amount and number of loans,” says Guy Cecala, publisher of Inside Mortgage Finance, which covers the industry. Bank of the West, which lends in 22 states, has its largest market share in California, says Paul Wible, senior executive vice president. “The ability to lend in the jumbo loan sizes here is critically important,” he says.

More than half of Bank of America’s jumbo lending is originated and closed in California, and dollar volume from January through August 2015 was up 20% over a year ago, says Ann Thompson, Bank of America’s regional sales executive for Northern California.

The spring housing market in the Bay Area was “incredibly aggressive,” and even in the slower summer, hot properties continued to sell with bidding wars pushing them above list price, says Maggie Visser, an agent with San Francisco-based Paragon Real Estate Group. Inventory is tight for single-family homes because there is no land to build new ones, she adds.

Rents in San Francisco are notoriously high, driving young professionals—often in technology or biotechnology jobs—to want to buy instead, says Mathew Carson, a broker with San Francisco-based First Capital Group. The median monthly rent for a one-bedroom apartment there was $3,530 in August, according to rental website Zumper. About 43% of Bank of America’s California jumbo loans in the first half of 2015 went to first-time home buyers, Ms. Thompson says.

The biggest challenge for these borrowers isn’t income, but having enough money for the 20% down payment, Mr. Carson says. Home buyers who come up short are left with the choice of buying a lower-priced home or paying a higher interest rate for a jumbo with a lower down payment.

Nearly 40% of Bank of America’s borrowers in California opt for a jumbo that requires a 15% down payment on loan amounts up to $1 million, Ms. Thompson says.

Here are a few more tips:

• Get preapproved. With cash competitors, sellers won’t consider an offer from buyers who are borrowing unless a lender has guaranteed that they qualify for the loan amount, Ms. Visser, the real-estate agent, says. Be prepared to waive appraisal and home-inspection contingencies, too, she adds.

• Await a new cap. The $625,500 cap on conforming loans in California’s high-priced areas hasn’t changed since 2008. The Federal Housing Finance Agency (FHFA), which determines loan limits, has indicated that it may raise the cap slightly this fall. Borrowers may find it easier to qualify for a conforming loan, and perhaps get a lower interest rate.

• Look nearby. While coastal areas have exorbitant home prices, inland places, such as capital city Sacramento ($292,950 median home price) and college towns such as Merced ($199,280), aren’t always so pricey, according to CAR data. Even the San Francisco Bay Area has some relative bargains being found by millennials willing to “push the edges” into transitional neighborhoods, Ms. Thompson says. The lowest Bay Area median home price is $360,690 in Solano County, about 90 minutes from San Francisco.